Fact check

The budget: truth, lies and wishful thinking - an economist's view

Gemma Tetlow, senior research economist at the Institute for Fiscal Studies, delivers her verdict on the key claims in the chancellor's speech:

1. "GDP growth for 2009 as a whole will be -3.5% ... from 2011 the economy will continue to recover, with growth of 3.5% from then on"

The chancellor downgraded his forecast for GDP growth this year to -3.5%. This is roughly in line with independent forecasters' expectations. His forecast for growth in 2010-11 (1.25%) is somewhat above what independent forecasters are expecting, however. The average forecast is 0.3% for that period. The chancellor also announced in the budget that he now thinks the credit crunch will reduce the potential output of the UK by 5%, rather than the 4% he announced in November's pre-budget report - a large permanent hit to the economy. This doesn't appear unduly optimistic.

2. "My public finances forecasts today include a provisional estimate for the potential cost of [bailing out the banks] - totalling 3.5% of GDP"

The chancellor's estimated cost of financial sector interventions is lower than the estimate published recently by the IMF - of 9.1% of GDP. The short-term impact on the measure of net debt is substantially higher than the 3.5% figure, but much of this is likely to unwind once the banks are returned to the private sector. The final long-run cost remains very uncertain.

3. "UK net debt, which includes the cost of stabilising the banking system, will, as a share of GDP, increase from 59% this year, to 68% next, 74% in 2011-12, and 78% and 79% in 2013-14."

Public sector net debt is forecast to almost double over the next four years - from 43% at the end of 2008-09, to 79% in 2013-14. This will be the highest level of debt seen since the mid-1960s, and the rate of increase is higher than at any time since the second world war. The extent of the fiscal tightening pencilled in by the Treasury for some years beyond the normal forecast period suggests an acknowledgement of a huge structural hole in the British economy, a permanent gap between spending and tax raising for years to come if they don't cut back.

4. "[Borrowing] will stabilise and then begin to fall in 2015-16 ... I expect the underlying current budget deficit to come back into balance two years later"

Under Brown's former Golden Rule, the current budget was meant to be in balance on average over the course of an economic cycle - in other words, the government's current revenues should have on average matched their current spending needs. This rule was suspended in last November's pre-budget report, at which point it was expected that the current budget would not return to balance until 2015-16. Yesterday's budget pushed back by a further two years the point at which the government expects the current budget to be back in balance. To help bring this about Alistair Darling yesterday announced a number of new tax-raising measures and cuts to public spending. But, because this is beyond the normal forecast period, there are no details of how this could actually be delivered.

5. "We have identified [tax] loopholes and schemes, which, when closed, will result in £1bn of extra revenue over the next three years"

The chancellor announced further measures aimed at increasing revenues by reducing the extent to which taxpayers are able to avoid paying taxes. Almost all recent budgets and pre-budget reports have included similar types of anti-avoidance measures. The measures announced yesterday and described by the Treasury as anti-avoidance, are expected to raise just over £0.5bn a year by 2011-12. Like all such forecasts, success of these measures remains hard to judge.

6. "I believe that it is fair that those who have gained the most should contribute more"

The budget looked to raise additional revenue from the highest earning 1% of the population, through an increase in the rate of income tax to 50% on income over £150,000, and a proposal to limit tax relief on pension contributions made by those earning over £150,000. The measures may not raise as much money as the chancellor hopes as the behaviour of this group is very responsive to the tax rates faced. However, limiting the tax relief on pension contributions does remove one way in which this group might seek to reduce income tax liability, albeit at the cost of added complexity.

7. "This will allow us to protect frontline public services, while keeping current spending growth, in real terms, at an average of 0.7% a year from 2011-12 onwards"

The budget cut forecast real growth in current spending from April 2011 to March 2014 from 1.2% a year to 0.7%. There were also cuts for investment spending - it will fall in cash terms from £44bn this year to £22bn in 2013-14. With spending on debt interest and social security benefits set to increase more quickly than the average over 2011-12 to 2013-14, the rest of public spending is likely to be squeezed even more. Improving the efficiency of public service delivery would help the government deliver these tight spending plans without any impact on frontline services, though it will still be extremely challenging.

8. "You can grow your way out of recession. You cannot cut your way out"

The chancellor sought to paint the package as a short-term boost to help recovery from recession. There was some additional spending and lower taxes this year. However, there was little net loosening of the public finances in 2010-11. The giveaways were matched by tax increases, particularly on motorists and the highest paid. With borrowing set to reach about 12% of GDP this year and next, Darling decided against substantial further fiscal stimulus. In fact, the budget sets out significant cuts to public spending plans from 2011 onwards.